The government has unveiled its audit and corporate reporting plans following last year’s consultation process. The reforms include the announcement of a new corporate reporting and audit regulator, increasing accountability for big business and “addressing the dominance of the Big Four audit firms”.

Reform is already under way, the government has announced – the Business Secretary has taken action today to enable the regulator to ban failing auditors from reviewing large companies’ accounts.

This has caused some concern about what this might mean for the audit sector, and whether the reforms could result in an exodus of large multinationals to overseas.

The reforms transfer power away from professional bodies and to this new regulator, meaning that accountancy is set apart from other professions, such as law and medicine, which continue to be self-regulated.

The government has confirmed that the Financial Reporting Council will be replaced by a new, stronger regulator – the Audit, Reporting and Governance Authority (ARGA). ARGA will have tougher enforcement powers and will be funded by a levy on industry.

The largest private, unlisted companies will come under the scope of the regulator for the first time. Unlisted companies with more than 750 employees and with over £750m annual turnover will come under scope of the regulator.

Directors at the biggest companies who breach their legal duties to be open with auditors or lie about the state of their firm’s finances, will face sanctions such as fines. The government has announced it will act to address ‘rewards for failure’ when it comes to director bonuses.

Large businesses will be required to provide more information to investors and the public about fraud prevention measures, risks and what metrics are independently checked.

FTSE350 companies will also have to conduct part of their audit using a ‘challenger firm’. ARGA will also have the power to force big audit firms to separate their audit and non-audit functions and to enforce a market cap “if the state of the market doesn’t improve”.

“Taking these measures as a package with the draft audit reform bill outlined a few weeks ago, the government’s approach has a half-hearted and lopsided feel to it,” says ICAEW Chief Executive Michael Izza. “Lessons from Carillion and other recent company failures have been ignored, with little emphasis now on tightening internal controls and modernising corporate governance.”

Izza says that ministers’ confidence will be misplaced if they think the reforms are enough to restore public trust or shore up the UK’s position as a global destination for investment. “We support the government’s ambitions to increase choice and improve quality in the audit market, but the challenge will be to achieve this while sustaining and growing capacity in the sector. The new regulator, ARGA, will be key to this, which is why it is a great pity that we will have to wait years for it to be established.”

David Petrie, ICAEW’s Head of Corporate Finance, also expressed scepticism about the reforms’ effectiveness, saying that sound financial management and control systems are a comfort for investors such as banks or venture capitalists.

“These also enable the preparation of audited accounts at relatively low cost. Remove that requirement and preparing sufficiently robust information to secure external funding quickly becomes difficult. If the practice becomes widespread and is ‘baked in’ by misguided reforms, then the UK’s entire smaller and medium-sized company base risks significant competitive disadvantage as a result of lack of access to capital and/or a higher cost of capital.”